The Federal Reserve operates under a legislative dual mandate: maximum employment and price stability. The two goals are compatible in normal times and conflict in stagflation. Understanding the mandate is the frame through which every Fed decision should be read.
- 01State the Fed's dual mandate in the words of the statute.
- 02Explain what maximum employment and price stability each operationally mean.
- 03Analyze a Fed decision as a resolution of the two goals.
The statute
The Federal Reserve Act instructs the Board of Governors and the FOMC to 'promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.' Long-term rates are largely a byproduct of the first two, so the operative pair is employment and prices.
The two goals
Maximum employment is the highest level of employment consistent with stable prices — a concept the Fed does not name a number for. Price stability is operationalized as a 2% annual inflation target on the PCE index. Both are long-run objectives; short-run deviations are acceptable in service of the long run.
The tension
In normal times, the two goals move together — a strong economy supports both employment and stable prices. In stagflation, they conflict — high inflation and high unemployment demand opposite responses. The Fed's role is judged by how it navigates the conflict, and the Volcker era is the modern template.
- Maximum employment and price stability.
- 2% inflation target on PCE, long-run.
- The mandate defines what the Fed can be judged against.